Income Tax Return - Assessment procedure, Income Tax Laws Video Lecture | Income Tax Laws - B Com

in this video I'd like to give you a
brief explanation of what income tax is
the type of things that constitute
income tax and then how you would go
about computing and calculating income
tax so I just want to say we're talking
about income tax in this video for
individuals and and what I mean by
individuals is not just one single
person could be a family I'm talking
about people and so that means it's not
corporations not Corpse not estates
they're all types of different entities
right such as a corporation or an estate
that that can be subject to income tax
but I just really want to focus on on
people so when we think about the types
of things that constitute income tax
it's good to think of some examples
obviously if I just said it's a tax on
income that really wouldn't tell you
anything so probably the number one
thing that most people associate is
wages right so you work at a job and and
you get a w-2 at the end of the year
every week you get your check or every
two weeks
those are wages right that's your salary
or your hourly income and so your wages
you know from your job that's what most
people think oh I have to pay income tax
on that that's easy for people to
understand but you can also have income
tax on an investment income right so you
can have things like dividends for
example that you're going to have to
report when you at least in the US when
you file a federal income tax return you
can have to pay tax on that income then
there are also things like like passive
income from knock I'm actually gonna
have a different video on but basically
if you're a limited partner right so if
you're a limited partner in some
business that'd be actually deemed
passive income because you're not
actively participating in that business
and then there's all kinds of you know
kind of miscellaneous types of income
things that you might not normally think
of I'll just give you a few examples if
you're paying alimony that that would
actually that's taxable income and then
if you win some kind of prize or
something let's say you went went on a
game show you won some kind of prize you
want a new card that's actually taxable
income as well there's a lot of
different things that they can fall
under the heading of taxable income and
I should just briefly mention that that
I mean not everything is automatically
taxed
there are some exceptions and for
example life insurance proceeds right if
someone passes away and the life
insurance proceeds are typically an it's
something that's exempt from income tax
right you call it you actually when
something's an exception you say that
it's tax exempt right now municipal bond
interest is exempt from federal income
tax returns in the United States so and
we'll have an hour video on what
municipal bonds are but if you're if
you're generating interest from uni
bonds then you don't have a report that
doesn't end up being taxed at the
federal level however it could be taxed
at the state level and that kind of
depends on what state you live in and
where your bonds are from so it's
important to note there are these
exceptions and and I should probably
mention that at least in the United
States that the federal income tax
started in in 1913 when Woodrow Wilson
was president and we also have so not
only do we have this federal tax in the
US but there's also you can have a let
me just put it up here so you've got
different types different types of
taxation you could be taxed at the
federal level on your income at the
state level and on the local level and
depends on where you live right your
state might not have income tax most
states do and even you know your city or
something might have some kind of income
tax so you can be taxed at different
levels and that's important thing to
know so now that we kind of have an idea
of the kind of things that have fallen
to income tax and and that there's some
there's some exceptions or some things
that are tax exempt and have these tax
benefits I just want to sketch out for
you just kind of a basic way of
understanding how tax is computed right
and how income tax is computed and now
I'm talking about in the United States
and I'm going to talk about at the
federal level right so your federal tax
return it's a lot of state taxed when
you have a state income tax return
sometimes it'll be actually be based on
numbers from your federal tax return
right so you figure out what your
adjusted gross income is or things I'm
about to talk about at the federal level
and then they actually use those numbers
for the state so I'm just
gonna focus on the federal tax and how
it's really computed just give you a
brief kind of understanding of how it
works so you start with gross income
right and as we mentioned certain things
are exempted they're tax exempt they
don't end up in gross income so they've
been excluded so gross income is
basically everything that could possibly
be taxed right so it's like everything
bought the life-insurance proceeds but
those contacts exempt items now it's
important to know and this is kind of
something that probably some of you
understand already but it is important
to know just because you work at a job
and you receive cash payments so let's
let's say you say oh I do this job
sometimes I hear people say like oh this
is a nice job because it pays cash so I
get the tax benefits of that you know
it's not well just because you get paid
cash for a job that does not mean that
it's tax exempt right getting paid cash
does not mean that something's tax
exempt right so you actually are
required to report cash income just as
if you received a check from your
employer and so forth now what people
really are doing is thinking that well
look it's hard for you know how could
the IRS possibly know that I receive
this cash and therefore I don't have to
report it in my gross income because you
know yeah I'm just gonna not report it
no one will be the wiser so in any event
I mean that is that is a crime that's
called tax evasion but I just not to
lecture you here but just to let you
know that just because you're paid in
cash that that may be something in fact
that you have to report in gross income
now we're gonna have something that that
I've titled here deductions for AGI
right deductions for AGI and and AGI let
me just maybe put that up here
well AGI we're talking about adjusted
gross income and it's really just a
subtotal adjusted gross income all right
because we're gonna be subtracting some
things and then we're gonna get a total
and then we're gonna subtract some more
stuff right so basically we're gonna
subtract some items that are gonna come
out and then that's gonna give us this
subtotal of a girl adjusted gross income
right and I've put I put this these
parentheses here around deductions
before a gross
just a gross income or deductions for
you can think of it either way it's
whatever's more convenient for you so I
put parentheses around this to indicate
that this is subtracted right so these
deductions are going to reduce your
gross income right so if your gross
income you know fifty thousand and then
your deductions for AGI are five
thousand your AGI would be forty five
thousand all right so the types of
things well you know what maybe even I
should just explain so we're going to
have deductions before AGI in deductions
after AGI or for or from so anyway you
want to think about it here I'll just
even put in here's before AGI and then
after however it's easier for you to
understand it now you might say this is
silly why don't we just lump all these
deductions together and why do we have
this subtotal and so forth well that
that actually gets a little more
complicated the reasoning for that let
me just tell you this so when you go to
have a deduction for AGI right you will
always get that deduction however the
deductions after AGI it's going to get
more complicated because what you're
gonna have and let me change colors here
so to really make sure you understand
this point so with the deductions from
AGI you're gonna have two options right
so one option is that you could take the
itemized it's what it's called
so you itemized you might have heard
about somebody itemizing do you itemize
or can I itemized this so this is an
itemized deduction so you can take
itemized deductions or you can take
what's called a standard deduction now I
know that this is probably sounding a
little complicated here let me just back
up and we'll kind of explain all this
right so the idea is this and let's skip
ahead to the deduction from AGI for a
second and we'll come back we'll come
back to this and I'll walk you through
this so with the deduction from AGI
they're basically saying look what the
standard deduction is it's different
every year but they're basically saying
okay there are certain items right let
me say itemized deductions there are
certain items you're mad
expenses charitable contribution and see
different things where if you could add
them all up right you could itemize them
add them all up and come up with a
number right whatever that that
deduction is right and say okay that's
my deduction from AGI or instead of that
we'll just give you a standard deduction
that is just okay by standard we mean
it's the same for everybody so if you
are a single person and you don't have
any dependents you don't have any
children you don't have you're just
filing taxes for yourself then we'll
give you let's say it's seventy three
hundred dollars right we'll just say
that that's that's your standard
deduction you know if you're single and
you don't have any dependents or so for
you're not like the head of household
you know you just you're single living
by yourself we'll give you a deduction
let's say seventy three hundred dollars
or you could add up all these different
items your miscellaneous expenses your
your medical expenses your charity
contributions all that stuff you can
just add all those itemized things up
and do that so if you say well you know
what I look at my itemized items and
let's say they're only add up to three
thousand but I could take a standard
deduction of seventy three hundred
you'll say okay I'm going to choose a
standard deduction in which case those
itemized deductions there were three
thousand let's say you donated to
charity you don't get any benefit from
that because it was actually more
advantageous for you to take the
standard deduction because it was higher
right so if if the itemized this is a
really important point so let's say this
was three thousand and your standard
deduction was seventy three hundred you
would take the standard deduction you
would say I'm just going to take that in
which case all those little things that
were itemized basically give you no
benefit because you're just taking the
standard deduction
so in that case certain deductions might
not actually be a deduction because you
just take the standard deduction
however deductions for AGI they're taken
out before we get to this point here
right we're ever having to make a
decision so it's basically saying if you
have a deduction for AGI you will get
that deduction whether or not you
itemize whether you take the standard
deduction or itemized
certain items the government has said
you know what we want to make sure you
get that deduction so we compute it
before AGI and you will you will get it
regardless of whether you I to Mize
right so let me just maybe even this is
an important point so not affected by
decision to itemize now let me give an
example I mean there are tons of things
that are deductions for AGI I just want
to give you example for example student
loan interest and as of 2014 I believe
student loan interest you can deduct up
to twenty five hundred dollars right now
whether or not you idem eyes doesn't
matter because student loan interest is
not an itemized abode adduction right so
whether you itemize or take the standard
deduction doesn't matter if you have up
to twenty whatever you have up to twenty
five hundred dollars of student loan
interest that gets deducted here and
then now you've got the subtotal of AGI
and then you go and say okay now my
deductions after AGI how much money do I
donate to charity you add that all up
you say what are your itemized
deductions and then if your itemized
deductions are higher than the standard
that you would get then you itemize you
list all those things out and you take
the the higher of the two of these right
so well I have an hour video well we'll
get into that a little more depth and
then now exemptions when we think about
exemptions exemptions are really you get
a deduction for yourself you know so
assuming now again if you're being
claimed by somebody else if let's say
you're a student and your parents are
claiming you this can get a little more
complicated but I'm just going to say in
general you're an adult you support
yourself then you get a deduction for
yourself and then also if you're married
and you're filing joint and you get your
spouse right the two of you and then any
dependents
now dependents you know might think okay
why have children those are dependents
people who depend on you and then they
have different rules of what technically
is a dependent do they receive more than
50 percent of their support from you and
something I'm not going to go through
all the rules
of determining whether someone's that
dependent but basically somebody depends
on you
for their living right so maybe you have
an elderly parent who is living with you
and you provide all their financial
support
that's a dependent right so you'd say
okay I got myself my spouse and then my
elderly parents there's three of us
right and you're going to get a
basically a deduction here and again
this isn't this doesn't affect your you
know what are you I to mised or not or
anything like this this comes after you
just gonna come out of AGI you're gonna
get a deduction right there might be
like $3,400 per per exemption or
something like that so you multiply it
by three it depends on the year every
year it's different so now that you've
deducted all those things you get two
taxable income now I've kind of
simplified things a bit here so do not
make it more complicated but even when
we get to taxable income we're really
not done because first of all we have to
determine what our tax rate is which is
is not as easy as you might think and
then second of all even once we
determine the rate we've got this thing
called tax credits right so so let me
just and again I'm gonna I'm gonna have
a separate video on like tax credits and
stuff so don't don't don't worry if
you're not grabbing it all yet just just
kind of try and take it in so once we
have this taxable income now we're going
to multiply it and maybe I'll put a
little multiplication sign here and
white so we're gonna multiply it
I apologize there's so much writing here
and everything it might be hard for you
understand we're gonna multiply it by
the tax rate now what makes this a
little bit difficult to kind of
comprehend for some people as you might
think right you might be somebody saying
hey if I make a certain amount of money
let's say my taxable income is $40,000
all right so let's say it's $40,000 then
I just go looking a table and say okay I
made $40,000 my tax rate is well I don't
know let's just say it was 20 percent or
20 25 percent let's just say that's not
probably I'm just talking just giving
you an example so let's say it was 25
percent so at least the way it works you
is what we have we've called progressive
tax rates right and they start you know
around it's typically around like 10%
now this has changes right every pending
on what what year you're viewing this
video in and you should not take this as
the lowest tax rate but be as low as
like 10% it could get up by like you
know 39% I mean back at you know
returning World War two and stuff we had
tax rates the highest bracket these are
called brackets different brackets so
the highest brackets we have brackets
that were up like 7080 percent
I'm like so it's basically somebody's
making like you know thirty million
dollars a year some being the highest
bracket and they but they've come down
the highest tax brackets have come down
a lot since that time in any event you
you have kind of you know the first you
know ten twenty thousand dollars of
taxable income you have you'll be in one
of those lower brackets and then as you
make more and more money you'll get to
higher bracket but here's the thing you
don't just say okay what bracket am I in
and then just apply that 25 percent to
the whole forty thousand right so it
might work it well depending on what the
tax rate is in the year in which you
view this it might say like okay the
first ten thousand of that forty
thousand is taxed at 10 percent right
and then the next ten thousand is taxed
at 15% and so forth so it's like it's
like it's it's it's stepping up
gradually as you make more money right
it's not like one blanket tax rate so in
any event you can go and and you don't
just pick a rate and then just multiply
it by your taxable income there are
tables you could look at the IRS has and
or you could just you know calculate a
kind of for each okay the first 10,000
was this and so forth in any event once
you've done this now you've come up with
with your tax due but but even that is
kind of a misnomer and I'm gonna explain
that in a minute so now you say your tax
due and you say okay finally we are done
but but unfortunately not really but
it's a good thing because you know the
government has come up with these things
called credits right tax credits so I'm
just going to put will put less any tax
credits and tax credits reduce your tax
dollar-for-dollar so I'm just gonna put
that produce tax dollar for dollar now
you might say hey what how is that
different than a deduction and we'll
have a different video on that while I
work through the numbers and stuff but
basically where as a deduction you're
just reducing it and then let's say you
let's say you have a deduction of $100
and your tax rate was 25%
now you're really reducing twenty-five
dollars of tax right because you've
reduced deductions reduce taxable income
they don't reduce tax and again like I
said I'll get in a different video where
I'll talk more about it but the tax
credits are reducing the tax do dollar
for dollars of you oh eight hundred
dollars in tax and you have five hundred
dollars and credits now you only owe
three hundred dollars in tax right so
you're not deductions reduce taxable
income tax credits reduce the actual tax
do dollar for dollars so there's
different things that government has
bond to provide incentives for like you
have like education tax credits and
stuff like that try and encourage people
go back to school help them out and to
basically reduce their tax dollar for
dollar when they do that now so this is
kind of a general overview and we'll get
into some of the specifics and talk more
about credits and so forth in other
videos but it's important to note that
at least when we're talking about the
federal income tax return in the u.s. so
federal is due April 15th right and
again like I said a lot of state returns
you'll base like it'll say like okay
what was your AGI from your federal tax
return and the way if you're gonna
compute so you compute their tax
yourself right you could do it yourself
and you could use software to help you
with that or you just use paper and
pencil right get the forms from your
library or I could use what's called a
preparer right you can hire an
accountant to prepare or it doesn't even
necessarily have to be a CPA or somebody
you hire somebody to prepare your taxes
for you and what you would do as an
input to doing all this what you want to
do is you know and at the end of January
you get a w-2 from your employer then
you also get like 1099 s they have to do
with any interest and so forth so you
get these these tax forms and then they
allow you to prepare your own taxes or
you give them to your preparer and they
do them for you